Nevertheless, potential investors should be aware that these rate-hedged corporate bond ETFs are still subject to credit risks. The funds may also underperform non-hedged bond funds if Treasury prices increase or yields retreat.
Furthermore, investors can also hedge against further bond market drawdowns through inverse or bearish ETF strategies that are designed to reflect the daily movements in the opposite direction of a benchmark index.
“The primary feature of using an inverse bond ETF hedge is that you can keep the majority of your client’s portfolio – the long-term asset allocation, the risk tolerance, and even the majority of income – completely intact,” Hyman added. “You may be able to reduce your client’s bond risk without selling highly appreciated bonds to do it.”
For instance, the ProShares Short 20+ Year Treasury (NYSEArca: TBF), which takes the simple inverse or -100% daily performance of Treasury bonds that mature in over 20 years. For more aggressive bond traders, the ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) tries to reflect the -2x or -200% daily performance of the ICE U.S. 20+ Year Treasury Bond Index, and he ProShares UltraPro Short 20+ Year Treasury (NYSEArca: TTT) takes the -3x or -300% daily performance of the ICE U.S. 20+ Year Treasury Bond Index.
To target shorter duration Treasury bonds, the ProShares Short 7-10 Year Treasury (NYSEArca: TBX) tries to track the inverse, or -100%, daily performance of the ICE U.S. 7-10 Year Treasury Bond Index. For those looking for a larger bet against Treasury prices and are willing to taking on the added risk, ProShares UltraShort 7-10 Year Treasury (NYSEArca: PST), tries to track two times the inverse, or -200%, daily performance of the ICE U.S. 7-10 Year Treasury Bond Index, and the ProShares UltraShort 3-7 Year Treasury ETF (NYSEArca: TBZ) takes the -200% daily performance of the ICE U.S. Treasury 3-7 Year Bond Index.
Potential traders should also keep in mind the risks associated with these geared products and be aware that leveraged and inverse ETFs are designed to produce their target strategies on a daily basis.
Financial advisors interested in learning more about positioning a fixed-income portfolio in a rising rate environment can watch the webcast here on demand.